Looking Beneath the Private Credit Headlines w/ Ares' Kipp deVeer

0:04Kipp deVeer: Credit is a business where as you get bigger, you get better. That's Kipp deVeer, co-president of Aries Management. For more than two decades, Kipp has helped grow Aries from a private credit specialist into one of the world's largest alternative investment platforms. Few investors have had a closer view of how private credit has evolved or deeper insight into the concerns roiling the market today. Relative to the headlines, which are quite negative, we're actually not seeing any fundamental sort of underpinnings that would say there are problems in private credit. Today on Dry Powder, we'll look beneath these headlines and examine what's actually happening in private credit.

0:42Kipp deVeer: We'll also explore whether AI is creating real risks for software lenders or whether the lingering fear of a SaaSpocalypse is turning out to be far less disruptive than many feared. I'm Hugh MacArthur, chairman of Bain's Global Private Equity Practice, and this is Dry Powder.

1:02Kipp deVeer: Kip, welcome to Dry Powder. It's a pleasure to have you on the show today. Thanks so much, Hugh. It's really nice to be here. Appreciate it. As I understand it, you've been at Aries for about 22 years, Kip, and you've really grown tremendously, obviously in credit where you're very well known, but also private equity, secondaries, real estate, some other real assets. How have you managed to develop a competitive edge across so many different types of businesses? Yeah, I mean, I think a lot of what we've done here is no one at our firm really are traders, right? So we think about, you know, how can we establish businesses that can build a competitive edge that's lasting, and that's sustainable over time.

1:43credit is a business where as you get bigger, you get better. So if you're a player in the loan market, and you're a player in the high yield market, and then you become a player in the private credit market, these things all create real advantages. And the same is true of real assets, whether it's real estate debt or infrastructure or secondaries. It's all about having experts in local markets, but making sure that those experts in their niches all collaborate well and use the advantage of the scale that we have. You know, folks always say public equities, other places, there aren't huge scale advantages in my mind in those businesses and credit in particular, but also in some of the real assets businesses that we've developed.

2:31There are real scale advantages from playing in these markets day to day, across geographies, across asset classes, both primary, secondary, et cetera. And we've just really tried to create a culture and a team at the firm that really leverages that and takes advantage of that.

2:48Kipp deVeer: I agree with you, Kip. Scale actually can be a big competitive advantage, certainly in asset classes like credit and some other real asset classes. Some of the pushback you tend to hear in the market is, yeah, but you get to a certain size and you really can't generate outsized returns anymore because you're just too big and you have to do everything and things become middle of the fairway deals, if you will, no matter what private asset class you're involved in. How do you at Aries actually utilize your scale in order to generate better returns? Yeah, I mean, I think it's all just investing in the platform.

3:23So I think it's adding capabilities, right? So I'll give you one example, maybe that gets to your question. But we grew up on the direct lending side as a sponsor coverage focused business, right? So we were doing mostly private equity deals. Something like eight or 10 years ago, we said we really need to add more capabilities to go direct to company. And we actually started building out distinct industry teams. So where we stand today, we've got a dedicated power, renewables, oil and gas, all of that team. We've got a health care and life sciences team, which allows you to jump in a much different way into that industry because of capabilities.

4:09We've got a dedicated software and services team. We have a dedicated financial services team. And what that allows you to do is it makes you better, makes you smarter on the LBO financings that you're doing. But it also puts you into the room going direct to company with CEOs, with really differentiated industry knowledge. So when you step into the room, you're not learning about a company. You're sort of already well kind of steeped in the vernacular that comes with some of these more specialized industries. And I think that's differentiated. You know, you're not putting a generalist into the room.

4:50You're putting somebody in who has real market knowledge, industry knowledge, company knowledge. And that allows us to do a lot more direct-to-company stuff than we were doing probably 10 years ago. And I think that's made a big difference. Right.

5:03Kipp deVeer: Now, one of the areas where you've had tremendous success scaling is obviously in private credit, many different elements of private credit. There's a lot of debate about private credit right now, specifically the health of the private credit industry, frankly, without a lot of data that I can see that would say that there's a problem there. But what is your take on the state of private credit markets today? I'll answer the simple part of the question first, which is, you know, we're actually not seeing any fundamental sort of underpinnings that would say there are problems in private credit. But our portfolios, whether it's the corporate credit portfolio, the asset-based portfolio, the real estate lending portfolio, the infra portfolio, they're all very healthy.

5:47And I could tick through some boring metrics of how we think about it. But relative to historical standards, non-accruals, defaults are low. There's good profit growth in underlying portfolio companies. Look, we participate in all of those markets. they've all become institutionalized, sort of accepted markets. Are they more efficient than when we started in the business 25 years ago? They are. They're orderly. We have to be at the market. I think we're one of the couple of market leaders that are driving terms and pricing and all of that. But we see the space as, frankly, very healthy, rewarding for investors, whether it's our institutional investors or our retail investors, the risk premium that we're continuing to capture relative to public markets is attractive.

6:41So long as your funding allows for illiquidity, which inherently is part of the picture. But look, I mean, our idea 20 something years ago was generate 8 to 12 % returns in a liquid credit and all of these assets for folks that find that attractive. And we've done that for a long period of time at scale.

7:04Kipp deVeer: And, you know, one of the things that we talk about at Bain is that you expect to see people doing better and people doing not as well in any industry, including the private markets. How do you see the performance dispersion between more established managers such as yourselves and private credit and some of the newer entrants playing out over the next few years? Is there going to be a diversion there? Yeah, I mean, we see, you know, there is a broad brush, right, that tries to paint the industry as how is everyone doing. I think there are two, three, four, five people that have real advantages, whether it's people, whether it's origination, whether it's scale and flexibility of capital commitments.

7:45I think that over time has continued to drive our outperformance. I don't know if it's necessarily new entrants, but certainly folks that don't have those advantages, i.e. are smaller or less diverse in terms of what they're able to source, there is adverse selection. Whether it's an LBO financing, if you're a private equity firm that's trying to raise a billion dollars to go do a deal, you don't call 25 people, you call two or three people. And our advantage is we're one of the first couple of calls. Our goal is to be one of the first couple of calls. And we want to be at the front end of that.

8:26We want to lead structuring. We want to lead pricing. We want to run the docs. A lot of what we pass on, for whatever reason, tends to go to others. And I would argue that that's probably less attractive than the stuff that we're able to lean into. So I think you're seeing that dispersion in results. I think you'll continue to see that dispersion of results. Folks always ask me, if I want to allocate to direct lending, how do I do it. And I say, pick two or three of the top five managers. Right.

9:01Kipp deVeer: So there is an undeniable benefit in being the first to get a look at any potential investment opportunity. Yeah. I mean, we think we're financing the best companies and the best transactions and the best opportunities. And we think the stuff that falls to at least our cutting room floor maybe ends up somewhere else and it's less attractive. And yeah, for sure. Now, Kip, you mentioned software earlier, but I want to come back to it because it is just so out there and there's so much noise in the marketplace. People are talking about in the conferences that I go to this word saspocalypse we've all had to live with now for the past few months and wondering if there is some endemic issue because of the size of the software market and the buyout industry that is infecting somehow private credit.

9:42Kipp deVeer: You're not seeing that is what I'm hearing you say in your portfolio at all in software? You know, we're not. My simple answer is I think it's more of a problem for the owners of some of these assets than it is for the lenders to these assets. We developed both on the buyout financing side, but also the direct to company side, what I think is significant expertise in that part of the market maybe 15 years ago. I mean, with the folks that were early said, you know, we're kind of orienting towards these strategies. We need lenders. We need you guys to come with us and did a lot of work there. It has and continues to be, if not the best, close to the best performing sort of industry segment in the portfolio, both in terms of growth, in terms of credit metrics.

10:36But I think the issue is, you know, there have been very high purchase prices paid for these companies. Right. You know, and by the way, you know, reasonably high leverage on the underlying debt that you're talking about, for the most part, companies that got bought for pick a number 20 times EBITDA, they got leveraged six or seven times. So the lenders have quite a lot of room for reduced valuations. I think what's going to happen over the next couple of years is we're just going to have to see some market testing and some resolution. So is the company that got paid 20 times for, is that worth 12 times?

11:13Is it worth 14 times? Is it worth 16 times? I don't know. But I think the question is more for the equity than it is for the debt. And look, I mean, AI is not like a brand new thing that just showed up, right? I mean, this was part of our underwriting. This was part of our investment committee discussion, which is as technology changes, do we have impact in the portfolio? We weren't really leaning into companies that we thought would be materially disrupted by AI in the first place. So I think we're pretty well set up and it's not something that's a significant concern for us these days.

11:47Kipp deVeer: Let's talk a little bit about the fuel that keeps this investment machine going. Can you take us inside of one of your recent fundraising efforts, Kip, and tell us a little bit about how a sophisticated IR team that you have at Aries really works through what's becoming quite a difficult fundraising environment across multiple private asset classes? So we have about 150 salespeople on the institutional side, right? And they're dispersed globally, U.S., Europe, and the APAC region. And then we have around 150 folks on the wealth team, you know, that sell through a different channel. We obviously have products that, you know, sell the traditional, you know, sovereigns, pensions, insurance, et cetera, on the private side.

12:30And then wealth is obviously the other piece of it. We're actually out raising our fourth commingled sort of regular way direct lending fund. So despite some of the non-traded BDC redemptions and all that, we're actually seeing tremendous interest from our institutional investors and our regular way loan product. But it's performance first, right? If the performance is there and there's belief in the strength of the platform and the franchise, it works.

13:04Kipp deVeer: No, you're absolutely right that performance trumps everything when it comes to raising money. One of the interesting things you said, Kip, is that you've got over 100 people in your wealth IR team that's sort of raising from that channel. How does private wealth fit into ARI's overall fundraising strategy? Yeah, so we've tried to expand, obviously, into that channel because it's accretive. But we're also bringing what we've done on the institutional side to a different client base. but we've tried to be tailored in terms of how we access it. So we've kind of leaned on three themes. So one is, you know, durable income in the private markets, right?

13:47And that's, again, something we can bring from the credit franchise to a retail investor, despite some of the redemption, you know, headlines. Most of the U.S. wealth channel is actually not the returner of capital. It's coming from elsewhere. So our U.S. wealth clients, largely through the wires, are very sticky. The second piece has been tax-advantaged real assets. And the third has just been diversified equities. So we have both the secondaries and a private equity strategy that sell into that channel. We don't wanna be everything to everybody. We wanna focus on two or three themes that we think we can be really, really good at and deliver on and build those in scale.

14:31So we have, I think it's nine products in that channel today. I don't think it's going to grow to 20 anytime soon. You know, sort of eight to 10 products there where we think we're really, really good and can offer everything that Aries brings to that investor. We said we don't want to be super, super reliant on that channel for capital. So I think we found the right balance.

14:56Kipp deVeer: Now, you've obviously, Kip, been one of the most successful firms in fundraising, and you've got a large team. You've done very, very well in terms of the AUM organically raised over the past years. What does it take beyond the performance that we've talked about to win in today's fundraising environment? What do you see as the other key elements here? Well, I mean, I think certainly the firm broadly that we've built as a platform is compelling for folks. And when we talk about some of the things that we were touching on before, you know, the scale advantage, but also the diversity of the markets that we play in.

15:34So we talk about the size of our team and the consistency of that team. I mean, our nine person investment committee and direct lending. I mean, I think the newest tenured member joined in like 2008. right. So it's just, it's just sort of like the consistency of the approach and the consistency of the results, the firm as a whole, the diversity of markets that we plan. I think there's just a lot of trust that, you know, as this market in alternatives has grown and consolidated, you know, there are some folks at the top, again, who have a very, very significant, easy to underwrite track record of generating better than average results with frankly, not not a lot of blips along the way.

16:25I mean, especially in credit, right? I mean, credit's about, you know, not making mistakes, not losing money, right? So when you show someone a 20 plus year track record, that's 100 plus billion dollars of, you know, invested capital on the direct lending side, that consistency of people approach at scale, I think, is something that's, you know, frankly, pretty easy to market and contributes to the fundraising success.

16:52Kipp deVeer: On the next episode of Dry Powder, Kip will share where Aries is most excited to deploy capital next. We now have a hundred plus billion dollar real estate business that lends in the U.S., lens in Europe, but their focus has been play into the areas of the new economy. So it's a lot of multifamily. It's a lot of industrial and logistics, and it's increasingly in digital and data centers. I'm Humaq Arthur. Thank you for listening.